ACCA Financial Reporting (F7) Practice Exam

What constitutes the lease term under IFRS 16?

1. The total period of the lease only

2. The non-cancellable period, including optional renewal periods if the lessee is reasonably certain to exercise the option

3. Only the fixed-term duration of the lease

4. The initial lease period plus any expected extensions

The correct answer is: The non-cancellable period, including optional renewal periods if the lessee is reasonably certain to exercise the option

The lease term under IFRS 16 is defined as the non-cancellable period of a lease, along with any optional renewal periods for which the lessee is reasonably certain to exercise the option. This approach reflects a more accurate representation of the economic benefits that the lessee expects to derive from the use of the leased asset over time. This definition takes into account the lessee's intention and ability to renew the lease, which can significantly impact the total duration for which the asset is controlled. If the lessee is reasonably certain they will exercise a renewal option, that period is included in the lease term, thereby aligning the recognition of lease liabilities and right-of-use assets with the actual use of the asset over the entire term that the entity expects to benefit from it. In contrast, defining the lease term as only the total period of the lease or just the fixed-term duration would ignore essential considerations regarding renewal options that might influence the entity's control over the asset. Similarly, focusing solely on the initial lease period, excluding expected extensions, does not capture the full extent of the lease's impact on the entity's financial position and performance. Thus, option B accurately encapsulates the IFRS definition of the lease term by considering both the unavoidable non-cancellable period